Sunday, October 14, 2012

What Do We Have To Give Up To Get More?

If we wish to have our federal government continue to spend 23 percent of the gross domestic product (closer to 40 percent if we count state and local spending), then we and our descendants must eventually be willing to pay roughly 23 percent of our incomes in taxes.

There is a limit to our borrowing capacity, and if we continue to cover 40 percent of the federal budget with borrowed money, we will soon experience that limit. The only way out is to ensure our economy grows significantly faster than government spending.

We cannot expect to achieve this by raising tax rates, unless those who bear the burden of these higher taxes do so cheerfully. Starting from relatively low rates of taxation, this is conceivable. But as tax rates rise, and more income is transferred from its private creators to those who will administer its disbursement, our productive potential will decline. Neither of these trends has been shown to foster cheerfulness.

It is not just the payment of taxes that limits our growth potential. There is no point in discussing tax policy without considering the purpose of the tax, the amount of revenue needed, and how that revenue will be spent. The purpose might not even be to raise revenue but rather to discourage some activity deemed socially undesirable, such as smoking. But our current discussions largely revolve around the size and persistence of the national budget deficit, the excess of government spending above tax revenue.